Lehman brothers case study audit


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The firm said that poor market conditions in the mortgage space "necessitated a substantial reduction in its resources and capacity in the subprime space". In , Lehman faced an unprecedented loss due to the continuing subprime mortgage crisis. Lehman's loss resulted from having held onto large positions in subprime and other lower-rated mortgage tranches when securitizing the underlying mortgages. Whether Lehman did this because it was simply unable to sell the lower-rated bonds, or made a conscious decision to hold them, is unclear.

In any event, huge losses accrued in lower-rated mortgage-backed securities throughout The Dow Jones lost nearly points the same day, on investors' concerns about the security of the bank. On September 12, , Timothy F. Geithner , then president of the Federal Reserve Bank of New York , called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of its assets.

Lehman brothers case study | 吉祥寺北口システム

The meeting goal was to find a private solution in rescuing Lehman and extinguish the flame of the global financial crisis. Lehman Brothers filed for Chapter 11 bankruptcy protection on Monday, September 15, According to Bloomberg , reports filed with the U. The filing remains the largest bankruptcy filing in U. Manhattan court bankruptcy Judge James Peck, after a seven-hour hearing, ruled: "I have to approve this transaction because it is the only available transaction. Lehman Brothers became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets.

This is the most momentous bankruptcy hearing I've ever sat through.

It can never be deemed precedent for future cases. It's hard for me to imagine a similar emergency. Luc Despins, the creditors committee counsel, said: "The reason we're not objecting is really based on the lack of a viable alternative. We did not support the transaction because there had not been enough time to properly review it.

Lehman's attorney Harvey R. On September 22, , Nomura Holdings, Inc. A few weeks later it was announced that conditions to the deal had been met, and the deal became legally effective on Monday, October Lehman's bankruptcy was expected to cause some depreciation in the price of commercial real estate. Additional pressure to sell securities in commercial real estate was feared as Lehman got closer to liquidating its assets.

Archstone's core business was the ownership and management of residential apartment buildings in major metropolitan areas of the United States. Jeffrey Spector, a real-estate analyst at UBS said that in markets with apartment buildings that compete with Archstone, "there is no question that if you need to sell assets, you will try to get ahead" of the Lehman selloff, adding "Every day that goes by there will be more pressure on pricing.

It said the assets accounted for 1. Shareholders also fled from Goldman Sachs and Morgan Stanley. Two weeks later, the Fed agreed to give them bank holding company status which provided vital access to the Fed discount window. Evergreen Investments said its parent Wachovia Corporation would "support" three Evergreen money-market funds to prevent their shares from falling.

Close to hedge funds used Lehman as their prime broker and relied largely on the firm for financing. In an attempt to meet their own credit needs, Lehman Brothers International routinely re-hypothecated [38] the assets of their hedge funds clients that utilized their prime brokerage services. Lehman Brothers International held close to 40 billion dollars of clients assets when it filed for Chapter 11 Bankruptcy. Of this, 22 billion had been re-hypothecated. As a result, the hedge funds were forced to de-lever and sit on large cash balances, inhibiting chances at further growth.

The Bank of Japan Governor Masaaki Shirakawa said, "Most lending to Lehman Brothers was made by major Japanese banks, and their possible losses seem to be within the levels that can be covered by their profits," adding, "There is no concern that the latest events will threaten the stability of Japan's financial system. Lehman was a counterparty to mortgage financier Freddie Mac in unsecured lending transactions that matured on September 15, Freddie also said it "does not know whether and to what extent it will sustain a loss relating to the transactions" and warned that "actual losses could materially exceed current estimates.

Farmer Mac said it might not be in compliance with its minimum capital requirements at the end of September. Conversely, bankers note that minibonds are indeed low-risk instruments since they were backed by Lehman Brothers, which until just months before its collapse was a venerable member of Wall Street with high credit and investment ratings. The default of Lehman Brothers was a low probability event, which was totally unexpected. Indeed, many banks accepted minibonds as collateral for loans and credit facilities.

The Hong Kong government proposed a plan to buy back the investments at their current estimated value, which would allow investors to partially recover some of their loss by the end of the year. Under intense pressure from the public, all political parties came out in support of the investors, further fanning distrust towards the banking industry. Neuberger Berman Inc. Neuberger and Robert Berman, to manage money for high-net-worth individuals.

In the decades that followed, the firm's growth mirrored that of the asset-management industry as a whole. In , it introduced one of the first no-load mutual funds in the United States, the Guardian Fund , and also began to manage the assets of pension plans and other institutions. Historically known for its value-investing style, in the s the firm began to diversify its competencies to include additional value and growth investing , across the entire capitalization spectrum, as well as new investment categories, such as international, real-estate investment trusts and high-yield investments.

In addition, with the creation of a nationally and several state-chartered trust companies, the firm became able to offer trust and fiduciary services. In October , the firm conducted an initial public offering of its shares and commenced trading on the New York Stock Exchange , under the ticker symbol "NEU". In July , shortly after the retired Mr. Neuberger's th birthday, the company announced that it was in merger discussions with Lehman Brothers Holdings Inc.

An article in The Wall Street Journal on September 15, , announcing that Lehman Brothers Holdings filed for Chapter 11 bankruptcy protection , quoted Lehman officials regarding Neuberger Berman: " Neuberger Berman LLC and Lehman Brothers Asset Management will continue to conduct business as usual and will not be subject to the bankruptcy case of the parent company, and its portfolio management, research and operating functions remain intact. In addition, fully paid securities of customers of Neuberger Berman are segregated from the assets of Lehman Brothers and aren't subject to the claims of Lehman Brothers Holdings' creditors, Lehman said.

Just before the collapse of Lehman Brothers, executives at Neuberger Berman sent e-mail memos suggesting, among other things, that the Lehman Brothers' top people forgo multimillion-dollar bonuses to "send a strong message to both employees and investors that management is not shirking accountability for recent performance". Lehman Brothers Investment Management Director George Herbert Walker IV dismissed the proposal, going so far as to actually apologize to other members of the Lehman Brothers executive committee for the idea of bonus reduction having been suggested.

He wrote, "Sorry team. I am not sure what's in the water at Neuberger Berman.

Shreya Kapoor

I'm embarrassed and I apologize. Richard Fuld , head of Lehman Brothers, faced questioning from the U.

Lehman Brothers Case Analysis - 2013 Case Analysis The...

I have a very basic question for you, is this fair? In March , the report of Anton R. Valukas , the Bankruptcy Examiner, drew attention to the use of Repo transactions to boost the bank's apparent financial position around the date of the year-end balance sheet. On April 12, , a story in The New York Times revealed that Lehman had used a small company, Hudson Castle , to move a number of transactions and assets off Lehman's books as a means of manipulating accounting numbers of Lehman's finances and risks.

One Lehman executive described Hudson Castle as an "alter ego" of Lehman. According to the story, Lehman owned one quarter of Hudson; Hudson's board was controlled by Lehman, most Hudson staff members were former Lehman employees. On February 22, , Judge James M. Peck of the U. Bankruptcy Court in the Southern District of New York rejected claims by lawyers for the Lehman estate that Barclays had improperly reaped a windfall from the section sale. In a section of a article entitled "Lesson 8: Illiquidity closely resembles insolvency," Blinder questions whether the situation with Bear Stearns, which was bailed out in March , was really that different from the situation with Lehman Brothers, which was not bailed out in September In both cases, rumors based on truths led to runs at each financial institution, which required selling some assets at fire sale prices.

But, especially given the consequences of a Lehman bankruptcy, was it really that much worse? Was Bear a clear case of illiquidity without insolvency while Lehman was a clear case of insolvency, with illiquidity a mere detail? I doubt it. From Wikipedia, the free encyclopedia. Main article: Subprime mortgage crisis. Banks portal. Uncontrolled Risk. McGraw-Hill Education. Retrieved November 11, The New York Times. Chapter 5 5. Chapter 6 6. Chapter 8 8. Bank failures are common occurrences that happen in many countries across the world; certainly each country has witnessed one of its bank failure at one point or another Basu, Accordingly, the government or the central bank of the concerned country has to intervene by providing a rescue deal for the collapsing banks.

However, such rescue deals are costly and difficult to provide particularly in this competitive business environment Donaldson, Though, banks failure seem to occur more in those countries that have liberalised their financial markets and carried out deregulated, there are also common in countries where banks have dished out bad loans and undertaken a high percentage of non-performing loans, a common aspect in countries that were in the past highly regulated and depended on government subsidies to survive.

This brings us back to our question; why do banks fail? Owing to the experience learned from the Great Depression, many scholar such as Wigmore , claimed that bank failures, mainly arose from the panic by depositors, which results in a run on the bank. The consequence of this is that the depositors are unable to know whether a particular bank is stable or unstable. When a bank fails, stakeholders normally suffer negative consequences, besides the consequences suffered by the failed bank. At times the consequences are also suffered by the non-banking industries.

Hooks contributing this subject underscores that bank failure greatly affects the economy in a negative way, and therefore it should be examined very critically. Kaufman has also stressed the bank failure and the associated consequences. Accordingly, Kaufman states that banking failure creates losses to stakeholders through the interference that occurs to the settlement system; more so, it has a systemic impact on the whole economy.

Northern Rock was the one of the biggest casualty of the global financial crisis that occurred between and During this period, the bank faced liquidity problems, and was forced to borrow from the Central Bank of England to resolve its liquidity issues. However, things did not change and depositors got afraid of the situation promoting them to withdraw their savings from the bank. This resulted in a bank run, and Northern Rock had to be nationalized in Stucke, In an attempt to resolve the financial issues surrounding the bank, the bank was privatised in to Virgin Money.

Lehman Brothers became bankrupt on 15th September At that time the bank had an assert base worth billion dollars and debts worth billion dollars. As noted by investopedia. Indeed, Lehman Brothers was the fourth-biggest American investment bank when it collapsed. According to investopedia.

UBS is the biggest Swiss bank with a global presence in more than 40 countries Krystof et al. The bank has been in operation for more than hundred years. UBS offers usual banking services e. The bank as many Swiss banks, is known for its confidentiality and fidelity. This merger saw UBS outgrow the market considerable in profits and assets; a high proportion of its growth was from its investment division.

This was the biggest corporate loss in the history of Switzerland. The Swiss government had to step in mid and bail out the bank Krystof et al. UBS loss shock the whole Swiss banking industry and affected the economy greatly is banking is the main global asset of Swiss Krystof et al. Various theories have been formulated by different scholars to explain the causes of bank failure.

Hook citing Kindleberger states that bank failure are caused by rapid increase of bank credit. On his part Chu claims that free banking is one of the causes of bank failure. It is important for the researcher to identify and describe the research topic when writing a dissertation Yin, This means that the researcher has to take enough time to describe the research problem.

In addition, Yin recommends that the research topic has to be logical and structural so that it can address the questions regarding what, who, why, where and how. This allows the researcher to formulate the correct approach to use. As stated before in the background information section, increase in bank failure has lead to many economists, bankers, regulatory bodies and even governments to take more great interest in this issue because it affects financial stability of a country. Chu notes that there is a general acknowledgement that banks are crucial element in economy and bank crises cost the entire economy thus, need for banking stability.

Banks accepts deposits from their customers and also gives loans to these customers; this means that they are financial intermediaries.

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A part from that, banks also allows their customers to pay bills through their accounts making them central in the payment system. The main rationale of this study is to establish why bank fail with special attention to three banks; Northern Rock, Lehman brothers, and Union Bank of Switzerland UBS.

However, in the recent past the numbers of banks that have collapsed have been on the increase.


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Thus, the need to re-examine the causes of bank failure, more so, the present research will provide additional understanding and knowledge to this subject. In summary, this chapter has provided the background information on causes of bank failure. In addition, the chapter has outlined the problem statement, purpose of the study. As noted in the earlier sections, bank failure results in considerable financial impact to the economy and negative impacts to other stakeholders. These huge costs from bank failures necessitate the need to examine causes of bank failure.

Several theories have been formulated to explain the causes of bank failure; these theories will be tested against the case studies.

How Lehman Had Months To Save Itself - Crisis On Wall Street

This chapter takes up from chapter one and outlines the aims and objectives, research questions and also gives that the structure of the whole dissertation. The research will be aimed at investigating the causes of bank failure. Further objectives of the proposed research are as follows:. The main aim of the present research is to examine why banks fail. Other objectives of the research are stated below:.

As mentioned by Yin research questions are very crucial for examining research problem in the right direction of the study. Accordingly, this research presents the following research questions. Chapter 1: Introduction: this chapter opens the with research paper by providing the background information of the dissertation, outlining the research problem, the rationale, and the aim and objectives of the study ii. Chapter 2: Literature review: this reviews the past literature on history of bank failures and theories of bank failure iii.

Chapter 3: Methodology: this chapter describes the research methodology, instruments and techniques adopted by this dissertation to gather and analyze the data iv. Chapter 4: Data analysis: Describes both qualitative and quantitative techniques to be used in presenting and interpretation of the data and explains the findings based on the case studies and the literature review v.

Chapter 5: Conclusions, Recommendations: This is the last chapter; it summarizes the findings the first four chapters as a conclusion, and provides recommendation based on the findings of the research. This short chapter has outlined the aims and objectives of the study, the research questions and the structure of the dissertation. As stated in the aims and objectives, this research aims at finding out why banks fail. The following chapter will review the theories regarding why banks fail and past studies on why banks fail.

It is important for the various stakeholders including customers, regulators and the management to understand the causes behind bank failures. Such an understanding will help the take stakeholders take an active role in preventing bank failure. Bank fail particularly concerns the management and the external regulators including the government.


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As noted by Hook when a bank fails, managers loss their jobs, the regulators shoulder the blame, and the government is expected to intervene. Similarly, other stakeholders should as well understand the causes of bank failure to be able to prevent it before it occurs. Certainly, when banks failure happens, all stakeholders suffer. How does bank failure occur? Though there are many ways in which banks fail, there is one common denominator of bank failure, the inability of banks to provide funds that depositors want. Nonetheless, supposing the rate of growth of banks deposits is below that of the deposit interest rate, it follows that banks have to make a full transfer of funds to depositors.

For this to happen, banks must transfer funds from their borrowers debtors , or use their liquidity funds.

Case Study : Lehman Brothers Case

This could be cause by high local interest rate, or due to low or negative deposit growth rate making it impossible for banks to get the demanded funds from their borrowers of their liquidity funds. But, in reality, this cannot happen because whatsoever the set maturity dates of the loans, borrowers would view an abrupt demand of credit as very disruptive.

Supposing the market is going through a credit crunch, corporate borrowers can be able to pay their loans if the credit crunch does not last for long, by cutting down some of their activities. According to Hook weakening economic factors affecting the local market such as high interest rates and inflation contribute to bank failure. Similarly, Gooldhart et al add their voice on this issue by restating that interest rate instability result in banking failure.

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